₹251 to ₹506: Stock Soars More Than 100% in two months. Do you own any shares?

Disclaimer: The views and recommendations made above are from personal observations. I'm not a SEBI-registered investor, kindly do your own research before making investment decisions.

The price of Vedanta Limited shares was down to ₹251 in March 2024 and the price shot up more than 100% in 2 months to levels of ₹506.

But before we proceed let's read some important details about Vedanta Ltd.

Vedanta Limited, a subsidiary of Vedanta Resources Limited, is a diversified natural resources company with operations primarily in India. It is involved in the exploration, extraction, production, and sale of zinc, lead, silver, copper, aluminum, iron ore, and oil & gas. It also has a presence across South Africa, Namibia, Ireland, Liberia & UAE.

In December 2021, with the successful acquisition of Nicomet, a nickel and cobalt plant at Goa, Vedanta became the sole producer of nickel in India.

Vedanta has the largest aluminum installed capacity in Odisha, India at 2.3 mtpa. It has a 47% market share in India among primary aluminum producers. Its manufacturing facilities include a refinery and captive power plant at Lanjigarh and a smelter and captive power plant at Jharsuguda also in the State of Odisha.

Its flagship power project Talwandi Sabo Power Ltd (TSPL) is located in Punjab. The company also has 25 years of long-term power purchase agreement with the Punjab State Electricity Board.

Vedanta is one of the largest merchant iron-ore miners in India. It has iron operations in Goa and Karnataka in India. The annual capacity of the company's iron ore business in Karnataka is 5.9 MTPA. Meanwhile, operations in Goa remained in suspension in FY22 due to a state-wide directive from the Supreme Court.

Vedanta Ltd share price history

Vedanta has a proven track record of capitalizing on commodity price surges. Its past performance during the early 2000s demonstrates its ability to benefit from strong demand for metals and minerals. The share price rose to over ₹200 levels during 2008. The company's share price saw substantial gains as revenues and profits surged due to high demand for metals and minerals.

The global financial crisis of 2008 led to a sharp decline in commodity prices and, consequently, Vedanta's share price also touched lows of ₹80 but within two years the share price surged to record highs of ₹460 aided by a rebound in global demand and strategic acquisitions that expanded its resource base.

Vedanta undertook expansion and diversification starting in 2011. The acquisition of Cairn India marked a significant step towards diversification beyond metals and minerals. Entering the oil and gas sector provides access to a new revenue stream and reduces reliance on a single commodity class. The share price during this period reflected both optimism around growth prospects and concerns over increased debt burden due to acquisitions.

Further, the decline in commodity prices since 2014 has negatively impacted Vedanta's revenues and profitability. This highlights the company's vulnerability to external market forces. This could have led to a loss of investor confidence and a decline in share price.

As observed, Vedanta's share price is highly sensitive to commodity price movements. Periods of high demand and good prices tend to lead to share price appreciation, while downturns can cause significant drops.

The COVID-19 pandemic in 2020 serves as a recent example of how external events can trigger volatility. Lockdowns and disruptions in global supply chains initially caused a sharp decline in commodity demand and Vedanta's share price, but the stock has since recovered as global economic conditions improved and commodity prices rebounded. As of date, it has seen a high recovery from its 52-week low share price.

Positives

1. The company pays a good dividend to its shareholders, thereby gaining credibility.

2. The stock is in a strong momentum with the price above short, medium, and long-term moving averages.

3. Foreign Institutional Investors (FII) are increasing their holdings.

Negatives

1. The company has a high debt of around $13 billion amidst plans for expansion. The debt-to-equity ratio is around 3 which means that the liabilities are 3 times more than assets.

2. Another threat is that promoters are decreasing their holdings by more than 1% while almost 100% of the promoter shares are pledged.

Impact on investment

As seen in the beginning an investment of ₹1 lakh would have given a profit of more than ₹1 lakh within months, which is a good profit for retail investors considering that this might be just one of their stock holdings.

Future growth prospects

Vedanta's planned capital expenditure (capex) of $687 million in the Oil & Gas segment and $1.4 billion over 2 years in the Aluminium segment suggests significant growth ambitions. The positive sides of these plans include:

Increased Production Capacity: The expansion in Aluminium capacity to 3 MTPA (million tonnes per annum) by Q3 FY24 and Alumina capacity to 6 MTPA by FY24 can lead to higher overall production and sales volume. This could translate to revenue growth if demand remains strong.

Improved Efficiency: The 100% operationalization of 3 coal mines can potentially improve Vedanta's vertical integration and potentially reduce reliance on external suppliers for coal, a key raw material for aluminium production. This could lead to cost savings and improved margins.

Exploration & Development: The investment in the Oil & Gas segment might indicate exploration for new oil & gas reserves or development of existing ones. This could diversify Vedanta's revenue streams and potentially lead to future growth in the Oil & Gas sector.

Meanwhile, some of the potential challenges are:

Execution Risk: Successfully executing these capex projects on time and within budget is crucial. Delays or cost overruns can impact profitability and investor confidence.

Debt Burden: The funding for these projects could add to Vedanta's existing debt burden. The company needs to manage its debt levels effectively to maintain a healthy financial position.

Commodity Price Volatility: The success of these projects hinges on continued strong demand and favorable prices for aluminum and oil & gas. A downturn in commodity prices could impact the profitability of these expansions.

Vedanta had a trade volume of 424,023 on July 9, 2024. Its 52-week high is ₹506 whereas its 52-week low is ₹208.